Despite Stress Tests, Risk is Back On

It looks like markets are gearing up for a move higher. Most risky assets jumped yesterday despite negative news. The S&P 500 is testing the big round number of 1100, the EUR/USD is approaching a key Fibonacci retracement level, and crude oil is pushing towards the $80 level. Today's stress tests release is the key event. Wisdom says that it's not what the news says; it's how the market reacts to the news.

Financial markets the past two weeks have been choppy, with risk going on and off again. Much of the movements have been tied to recent economic data releases. Yesterday's economic data was mixed across the board, divided between the two continents. European industrial orders and British retail sales were stronger, along with U.S. housing data and strong earnings from U.S. corporations which helped to increase trader's risk appetite. But higher U.S. weekly employment claims, and a warning from Ben Bernanke on the U.S. economy, countered this positive attitude.

But yesterday's trading struck a chord: despite the negative outlook for the U.S., risky assets were trading higher. This shows a convergence and a red flag; when risky assets rise in spite of negative news, a shift is occurring in the markets.

Despite the uncertain outlook the Fed has regarding the U.S. economy, the S&P 500 was up 2.25% yesterday. The index made a close above the recent downward sloping trend line, indicating a potential reversal of the bearish trend to a bullish trend. Now the index has the big round number of 1100 in its sights.

Spot crude oil was significantly stronger with the price of the commodity rising 3.5%. This breakout was enough to propel the commodity out of its trading range that has contained the price for the past two months. Now spot crude oil is targeting the $80 resistance line. A breach of this level could take the price of the commodity higher in the long term towards the range between $87 and $90.

The euro will be in the spotlight today with the release of the European bank stress tests later this afternoon. This could be a turning point for the EUR/USD as a positive outcome could push the recent bullish run for the pair higher with a first target the 38.2% Fibonacci retracement level at 1.3110. A negative outcome could have traders sending the pair lower and potentially continuing the long term bearish trend that the pair has experienced since last December. The first support would come in near the low of yesterday and Wednesday's trading at 1.2720.

All eyes will be on the outcome of the stress tests. Those who remember, when the U.S. banking stress tests were released, it was considered a turning point in the U.S. economic recovery. Today's event could be of a similar magnitude.

But yesterday's trading struck a chord: Despite the negative outlook for the U.S., risky assets were trading higher. This shows a convergence and a red flag; when risky assets rise in spite of negative news, a shift is occurring in the markets. Traders may begin to favor higher yielding assets and shun those that are considered safe havens, such as the dollar, yen, and gold.